Market imbalance causes pricing polarity

By Staff -- Purchasing, 4/5/2001

Though the chlor-alkali market often sees cyclic fluctuations in terms of supply, demand and pricing, it is arguable that never before have these market factors been more out of balance.

Chlorine and caustic soda are chemical co-products that have a converse market relationship-when the market is strong for one chemical, it is usually weak for the other. Thus, in the last year, strong demand for caustic soda flooded the chlorine market with material.

Factor in the high cost of natural gas, which makes up more than half of the total cost to produce chlor-alkali, along with slower demand from chlor-alkali's major end-use markets-particularly pulp and paper and the vinyls chain-and the result is the current pricing situation: chlorine and caustic soda prices at each end of the spectrum.

Producers continue to cut back supply where they can to tighten the chlor-alkali market. According to one chlor-alkali producer based in Texas, average producer operating rates have been cut back from close to 90% in November, to about 80% in February. And with many producers throttling back production for both scheduled and unscheduled maintenance turnarounds, the source says that operating rates in the mid-70% range will be likely for the next couple of months.

With slower demand and little buying activity (many buyers topped off their inventories in late 2000 and early 2001) market conditions are likely to continue unchanged, though most sources are not ruling out the possibility of a demand boost in the early summer.

PURCHASING FORECAST : Look for a continuation of the current market situation at least through second quarter 2001 and possibly through the fall.

Buyers should closely monitor changes in the paper and vinyls markets, as well as changes in the overall economy for an indication of when the market will begin to shift.

Price extremes

Buyers responding to PURCHASING 's monthly survey of chemical prices have seen chlorine prices drop significantly in the past two quarters, from about $275/ton average in the third quarter for spot buys, to about $130/ton in first quarter 2001, and below the $100/ton mark currently. The drop in contract pricing has been less pronounced. Buyers reported contract pricing of about $250/ton during the third quarter of last year, which fell to an average of about $170/ton during the first quarter of this year.

"There's an awful lot of chlorine material available," says Mary Blackburn, chlor-alkali and vinyls market analyst with Houston-based Chemical Market Associates Inc.

An Alabama-based chlorine buyer agrees, adding that he has "seen spot chlorine prices fall as low as $25/ton to $30/ton fob in the past few weeks."

In the coming months, buyers expect chlorine pricing to stabilize right around the $100/ton level for spot tags and at about $150/ton for contracts. Then, with warmer weather and moderately improved demand in the late second and early third quarters of this year-as well as some anticipated relief in natural gas costs-look for producers to raise pricing as much as possible. However, buyers expect minimal price gains to stick in the market through the end of the year.

With the chlorine market well below normal profitability levels, producers are trying to make what profit they can on caustic soda. Because of the higher energy prices across the country, chlor-alkali producers are getting hammered on their operating costs. "Producers are watching their order books very closely," says the Alabama-based buyer, "because they can't afford to let any revenue come off for caustic soda."

For diaphragm-grade caustic soda material, buyers report steady price increases amounting to nearly $100/ton on the spot market since September 2000. Contracts have also increased from about $180/ton to the current price average ($255/ton) for the same time frame. Price increases scheduled in the first and second quarters of this year will continue to be implemented in the marketplace during the third quarter as demand for caustic gets a boost from marginally improved demand from the paper market and general economy.

Rayon-grade caustic soda pricing has and will continue to follow the same trend. And though rayon-grade material pricing generally runs about $30/ton to $50/ton higher than for diaphragm-grade material, buyers and suppliers say it is currently about $60/ton more. Buyers' data show spot prices have risen from nearly $230/ton in third quarter 2000 to about $350/ton now. Contract prices have increased about $70/ton since then, now averaging close to $300/ton, say buyers.

Regarding the availability of caustic soda, the Alabama buyer says that he thinks that there is more material in the marketplace now, compared to the first few weeks of January. This he attributes to pre-buying and inventory building. "Usually when prices are rising, buyers try to buy up as much material as they can get their hands on to hedge their bets in anticipation that prices will go higher," says the buyer. "Now, there doesn't seem to be much demand, and I think high inventory levels have a lot to do with that."

CMAI 's Blackburn believes that vinyl orders have picked up somewhat in the past few weeks. "Converters are gearing up to restock their locations, though many have postponed this until next month, when vinyl conditions are expected to improve due to the seasonal resurgence of demand from the construction market," she says.

Though the market may see some increased demand in the near term, a long-term demand forecast will depend heavily on a change in energy costs and general economic conditions. According to the Texas-based producer, most sources are taking a bullish stance. "Energy costs are dissuading producers from adding capacity, except to satisfy specific demand requirements," he adds.

"Many companies are deciding that producing material now is not justified by the return," CMAI 's Blackburn agrees.